Revocation of Charitable Status

The Minister of National Revenue (“MNR”) proposed to revoke the registration of Public Television Association of Quebec’s as a charity pursuant to Income Tax Act (“ITA”) subsection 168(1) for failure to comply with the requirements prescribed in subsection 149.1(1). Specifically, for failure to devote all of its rescues to its own charitable activities (and alternatively, for making gifts to a person other than a qualified donee).

The Appellant brought an appeal pursuant to ITA subsection 172(3). The Federal Court of Appeal (“FCA”) dismissed the appeal on the basis that the ground put forward by the MNR are sufficient for revocation, and the Appellant having failed to show that the MNR’s decision was unreasonable.

What was lacking were details of decisions that demonstrate control and direction in the communications and internal documents, and that the contractual methods of control were in fact exercised (including minutes of board meetings) of the Appellant (see paras 46-54). In other words, the charity failed to demonstrate that it functioned in reality in the manner that its legal obligations and structure appeared to suggest it functioned.

ANALYSIS

The FCA began by setting out the statutory framework:

Definition of “Registered Charity” in subsection 248(1) – refers to the meaning assigned to “Charitable Organization” the term in subsection 149.1(1);

Definition of “Charitable Organization”in subsection 149.1(1) – requires that all the resources of the organization be devoted to the charitable activities carried on by the organization itself; and

Definition of “Qualified Donee” in subsection 149.1(1) – a person that is registered with the MNR and is a registered charity.

The MNR sent notice to the Appellant, under paragraph 168(1)(b), of the intention to revoke its registration for continued non-compliance with the requirements of the ITA for registered charities. This was the first ground of revocation. The second ground for revocation was for making a disbursement by way of gift to a non-qualified donee pursuant to paragraphs 149.1(2)(ii).

The Appellant’s was audited for its fiscal periods ending in 2005 and 2006, and the auditor concluded that the only activities for the period was the purchase of a program package from a US charity for fairing on certain TV channels (paras 17-18). The issue revolved around whether the Appellant exercised control and direction over the programs it sponsored/purchased. The Tax and Charities Appeal Directorate framed the issued in these words (para 22):

In order to comply with the provisions of the Act, a charity must maintain ongoing direction and control over its resources and its charitable activities. This means that the charity must take decisions concerning significant issues related to its ongoing activities and maintain a record of the steps taken, as part of its books and records, to allow the Minister to verify that the charity’s resources have been used for its own activities. Where the charity conducts activities through an intermediary, it should be in a position to establish by credible evidence that the activities are, in fact and in law, carried on by the charity itself. We refer you to the CRA’s Guidance “Using an Intermediary to Carry out a Charity’s Activities within Canada” […]. [emphasis original]

Although the agreement between the Appellant and the US charity stated that the Appellant would retain control and direction over what programs it supported with its funds, the CRA was of the view that the Appellant failed to demonstrate that the provisions of the agreement were in fact followed and respected (para 25):

While a broadcasting agreement and a fundraising agreement exist between PTAQ and Vermont Public Television (VPT), it has not been demonstrated that the provisions of the two agreements were followed and respected. No documentary evidence has been provided to demonstrate that PTAQ is monitoring the cost of the broadcasting activities, the donations received and the fundraising, and that it is ensuring that all of this is, in fact, its own activities. VPT is only informing PTAQ on how much donations were received, what is the cost of the broadcasting and the fundraising. PTAQ does not exercise direction and control over any of these activities. We maintain that all the activities are carried on by VPT and that PTAQ is only used to issue receipts for donations received by VPT from Canadian donors. [emphasis added]

Although a charity can conduct charitable activities through an agent, the charity must “be prepared to satisfy the Minister that it is at all times both in control of the agent and in a position to report on the agent’s activities”, with the onus being on the charity to prove the requisite control and direction – Canadian Committee for the Tel Aviv Foundation v Canada, 2002 FCA 72, paras 27, 28, and 40. The charity must demonstrate that the agent is carrying on work on the charity’s behalf and must prove that the activities of the agent are that of the charity and not that of the agent – BayitLepletot v Canada (Minister of National Revenue), 2006 FCA 128, paras 5 and 6.

What was lacking were details of decisions that demonstrate control and direction in the communications and internal documents, and that the contractual methods of control were in fact exercised (including minutes of board meetings) of the Appellant (see paras 46-54). In other words, the charity failed to demonstrate that it functioned in reality in the manner that its legal obligations and structure appeared to suggest it functioned.

Every year I make this primer, an Introduction to Tax Policy Theory, available to my tax policy students (and otherwise send it whenever I'm asked for an overview look at tax policy basics), so I decided to post it on SSRN. It is not a published piece but may be some day. Here is the description:Taxation […]